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Tax credit boosts interest in Indiana's college plan: Break offsets what some consider excessive fees

September 24, 2007

Parents sifting through the dizzying array of college-savings plans must feel as though they're playing their children's Pin the Tail on the Donkey game: Make a blind stab and hope for the best.

But a state tax credit that took effect at the start of the year seemingly is providing enough incentive to steer Hoosiers toward Indiana's 529 offering despite the hefty fees that accompany it.

The bill that created the 20-percent tax credit-equaling $1,000 on contributions up to $5,000-vaults the Indiana plan to the upper tier of choices. Most states offer a deduction, but Indiana and Vermont are the only two providing the more valuable credit, which reduces taxes dollar-for-dollar.

The number of Indiana residents enrolling in the plan since January has more than doubled, from roughly 18,000 to 38,000. Including out-of-state enrollees, the plan has 83,837 participants, according to the Indiana Education Savings Authority, which oversees the plan.

U.S. citizens can enroll in any state plan, regardless of where they live, but only residents of the state offering a particular credit or deduction are eligible for the tax break.

"I don't think we ever put anyone in an Indiana 529 plan before this tax credit came along," said Charles Miller, a retirement specialist and wealth management manager at locally based Veros Partners Inc. "When we analyze each state's 529 plan ... we look at a lot of parameters, and Indiana was not really on the list."

The high fees charged by administrator JPMorgan Chase & Co. historically kept him from recommending Indiana's plan to clients, he said. Veros is a fee-based wealth management firm and does not earn commissions. Now, financial planners are taking notice, however.

Chris Cooke, managing director of investments at locally based Cooke Financial Group, likened the improved Indiana plan to running a 100-yard dash with a 20-yard head start.

"Without the tax credit, it's average," he said. "With the tax credit, it's an excellent plan."

Credit outweighs expense

College-savings plans have become wildly popular in recent years due mainly to three factors: Congress made permanent the tax-free withdrawals that had been slated to end in 2010, financial aid rules were clarified and quelled concerns the plans could hurt eligibility for grants and loans, and many 529 providers slashed expenses and upgraded investments.

Indiana's plan offers two investment options: a program that can be purchased directly on one's own and a custom version that can be accessed only by a financial adviser.

Annual fees for the simpler option range from 0.91 percent to 1.17 percent, and from 0.60 percent to 2.69 percent for the custom choice, which gives investors more portfolios from which to choose.

To compare, New York-based TIAACREF recently reduced fees on its Michigan plan from 0.60 percent to 0.45 percent.

Considering a $10,000 investment and 5-percent annual growth over 10 years, Indiana plan participants would pay $1,374 in fees during that time, according to a study from the savingforcollege.comWeb site.

The cost lags only a handful of states as the most expensive in the nation. Despite assertions from JPMorgan executives that the figures are misleading, its rates are still among the highest.

Using the same factors, they say the cheapest option would cost $1,120 and the most expensive $1,420, even more than savingforcollege.com's estimate.

Including both direct- and adviser-sold plans, only Alaska, Illinois, Montana, Nebraska and West Virginia have higherpriced plans. Conversely, Louisiana has incredibly low expenses of just $19 over 10 years. Several other states, such as North Carolina, Ohio and Oregon, have options costing $300 to $400.

"When compared against other adviseroriented plans, our fees are competitive, and we believe that adviser guidance benefits participants," said a JPMorgan spokeswoman in an e-mailed response.

The Indiana tax credit is appealing enough to offset the costs, said Joseph Hurley, founder and CEO of savingforcollege.com.

"Certainly, the credit adds a terrific benefit for Indiana residents," he said. "Essentially, you're getting a 20-percent return on your investment. That's one way to look at it."

Savingforcollege.comgives Indiana's 529 plan a cap rating of 4.5 out of 5, based on various criteria.

Further, the performance of JPMorgan's best growth portfolio over the past three years ending Sept. 30, 2006, beat the S&P 500 13.1 percent to 12.3 percent. Its balanced portfolio grew only 8.8 percent, however.

The plan's assets total $634 million, including $228 million invested by Hoosiers.

Contract up for bid

Fee reductions to Indiana's plan could make it even more attractive. JPMorgan's contract as plan administrator concludes at the end of the year, and the state has received proposals from five parties, including JPMorgan. The others are TIAA-CREF; New York-based Oppenheimer & Co. Inc.; Lincoln, Neb.-based Union Bank & Trust Co.; and Newton, Mass.-based Upromise Inc.

Regardless of who is selected, fees next year will be "significantly" lower, said Jodi Golden, executive director of the state Education Savings Authority.

"We're not dissatisfied with JPMorgan Chase, but we want to make sure our fees are competitive, among a number of other things," she said. "We need the best combination of all factors."

The state's college savings program was one of the first in the nation when it launched in September 1997 as a conservative investment in which only one fund was available. Now, there are roughly 85 plans available nationwide, with almost every state offering at least one program and some, such as West Virginia, offering as many as five.

Faced with so many choices, parents and grandparents have been pouring money into these plans-a record $5.2 billion during the first quarter of this year alone. By 2010, 529 assets are expected to reach $300 billion, according to Financial Research Group in Boston.

With college costs climbing at a 6-percent annual clip-double the rate of inflation-it is estimated that four years of tuition and room and board at a public school could run $125,000 by 2022. For a private college, it could be closer to $300,000.
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